Rebuilding Basil Read

Cash-strapped construction firm Basil Read entered the second stage of its turnaround strategy in late January when it announced a rights offer that will see 1.36bn new shares issued, with the aim of raising R300m in capital, dwarfing its market capitalisation of R46.6m.

There are currently only 132m of the company’s shares in issue, so after the rights offer there will be 1.5bn shares issued in total.

It plans to use the proceeds to reduce debt, increase working capital and fund operations.

When the company announced details of the rights offer on 29 January, with the new shares valued at 22c – a third of the then market price of 65c – the share price fell more than 10%.

Speaking to finweek from Cape Town early in February, Basil Read CEO Khathutshelo Mapasa said he was happy with the market reaction to the announcement and that it bodes well for the rights offer.

“If you look at the response to the rights offer, the 10% drop is supportive of the rights offer, as the discount on the new shares is significantly more,” he commented. 

“We have secured irrevocable support from more than 50% of shareholders. The discount is enticing to them.”

These shareholders include Allan Gray, PSG Asset Management, Prudential Investment Managers and the Industrial Development Corporation (IDC).

“Everyone can see there is a lot of support,” Mapasa said. “Turnarounds do not happen overnight, it’s not like you can flick a switch.”

Basil Read has been around for 60 years, and according to Mapasa his team can, with the support of the shareholders, ensure it’s around for another 60.

Mapasa, previously head of Basil Read’s mining division, was appointed acting CEO in June 2017 after former CEO Neville Nicolau retired.

He also has a new team. Pieter van Buuren has joined the company as chief financial officer. 

Van Buuren previously worked at Murray & Roberts, Bell Equipment and York Timbers. Another newcomer is Richard Simpson, who heads up the roads and construction divisions.

“I have a team that is motivated,” stated Mapasa. 

Liquidity concerns

Liquidity problems at the company had developed in the construction and roads divisions, he explained, stating that just a handful of projects had created the problem. 

These included a Trans Caledon Tunnel Authority contract in Limpopo, an administration craft basin harbour extension at Coega and several roads projects.

According to Mapasa, increased competition, poor contract margins and low infrastructure spend were the factors that played a part. 

“Growth in construction spend has tapered off,” he stated. “It’s below inflation. It’s also a very competitive market and margins need to be cut thin in order to win work. 

The margins are cut so thin that if anything goes wrong, it puts your company in distress.

“We understand what went wrong,” he said. “There are some projects we entered into, where we shouldn’t have.

“We need to focus on the areas where we are competitive, where we have the skills.” 

Mapasa said the mining and development divisions had consistently delivered sustainable profits and that the turnaround would see these two divisions receiving most of the focus. 

The first course of action in the turnaround was to dispose of non-core assets. Negotiations on the disposals are fairly advanced and are expected to yield about R150m, although the assets being sold have not been made public yet.

The second was to obtain a R150m bridging loan from the IDC, which Basil Read had drawn down on by December last year.

According to Mapasa, the R300m the company is looking to raise through the rights issue will be split in half – R150m will be used to pay back the bridging loan from the IDC and the other half will go towards operating capital.

In December Basil Read announced a debt standstill that will remain in place until May 2019.
 
“This was a very important element in the turnaround strategy,” Mapasa explained. 

“We negotiated an 18-month payment holiday, with another 18 months after that. This gives us 36 months to exit contracts that are cash-strained.”

This involved negotiating with Aluwani Capital Partners, Credit Guarantee Insurance, Investec Bank, Lombard Insurance Company, Standard Chartered Bank and the IDC for an 18-month debt standstill on the R380m in loans and over R1bn in guarantees that Basil Read was liable for.

The company will have to consult the six creditors before implementing any major new strategies, disposing of assets or paying the executives bonuses.

It also confirmed that retrenchments at management and executive level at the group’s head office should be expected.

The construction firm has an order book of R10.7bn, which was encouraging for Mapasa.

Sins from the past

Basil Read’s involvement in collusion in the construction cartel, which resulted in seven companies being fined a combined R1.4bn, was before Mapasa’s time as CEO. 

Yet, he still has to deal with the ramifications of the firm’s conduct. 

Outside of the R95m fine that Basil Read was forced to pay, it is also a part of the settlement with the government that will see R1.5bn spent on socio-economic projects, through what is known as the Voluntary Rebuilding Programme, over the next 12 years.

The construction companies taking part have to agree to sell off 40% of their shareholding to a black economic empowerment partner or agree to mentor two to three emerging black-owned construction companies.

The target is to get these companies to 25% of the construction firm's revenue within seven years. Basil Read has committed to becoming a 51% black-owned company, according to Mapasa, who explained that the settlement between the construction firm and the government was in everybody’s interests.

“The construction sector is very important for the economy. It doesn’t serve anyone to let it collapse,” Mapasa commented.

He added that Basil Read had come a long way since the days of the competition cartel prosecution: “We have taken great strides. Internally we have looked at our processes and improved training.”

All the members of his management team know the Competition Act intimately. “We can’t afford to slip up and disappoint the nation, like we did in the past,” Mapasa said. 

This is a shortened version of an article that originally appeared in the 1 March edition of finweek. Buy and download the magazine here.